When Lenders Disappear

R.K. Kliebenstein, with contributions from Neal Gussis Comments
Posted in Articles, Finance
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At the huge International Council of Shopping Centers convention this past year in Las Vegas, one of the keynote speakers touted there may never be a downturn cycle or major recession in the economy because of a permanent abundance of capital and access to that capital.   If you have followed the recent turn of events in our industry, you are reminded more than ever of the early 1990s when self-storage capital was hard to find. Firms have come and gone. Self Storage Mortgage Corp. no longer exists except to service the loans made in the mid-1990s. Belgravia was consumed by Finova and, at this writing, is out of the market. First Security Commercial Mortgage has lost its most familiar face, Neal Gussis. No one much hears of U-Haul offering finance deals, and even the biggest of players such as Nomura have faded into oblivion.

The need for capital still thrives, and the good news is that the capital itself still exists. There are specific kinds of debt and preferred places to access the debt markets. The search is a little more difficult than it was just a few short months ago. If you are seeking a refinance, two giants still have market presence: Heller Financial and General Electric Credit Corp.

The majority of capital sources for permanent financing, including the two just mentioned, look to mortgage brokers to procure a majority of their permanent loan business. There are two key characteristics of the self-storage industry that make it restrictive for capital sources to invest in direct-marketing campaigns: The average transaction is smaller than other property types, and the ownership concentration is very broad.

Construction and development loans are still best made by local banks, and are often referred to as "relationship" loans. These are transactions handled by your local banker, who is best equipped to administer and analyze local transactions. Expect to pay an interest rate 2 percent to 4 percent above the "prime rate" or 300 basis points over LIBOR (London InterBank Offered Rate). These loans, typically three years in term, are designed for getting the borrower through the construction and lease-up period.

Permanent Financing

When you know there is capital available but not always accessible, what should you consider? There is often a need to find a specialist who can communicate with the lenders and drive the best deal possible. These professionals are called loan brokers. There are mortgage banking and brokerage shops throughout the country that make it their job to understand which capital sources or lenders are in the market and the programs offered.

In many cases, the financing fees you pay will be the same regardless if you go direct to the lender or if you go through a broker. Many times, capital forces allow the broker to earn financing fees that would normally be charged by the lender. Loan brokers have various relationships with the capital sources. If the broker is an exclusive correspondent, he is the "middle man" between the lender and borrower. Borrowers may not have access to the lender except through the exclusive correspondent. You may still need to shop the deal, however, because a broker with exclusive correspondence is primarily representing one funding source.

There are brokers who have correspondent relationships with capital sources that are not exclusive. With correspondent relationships, the broker has incentives based on loan volume. There may be instances where there is both a lender's financing fee as well as a broker's fee, but the lender has the best overall deal.

Why a Broker?

Why would anyone choose to use a broker? As a borrower, you may not be familiar with loan underwriting (the process by which a lender determines the amount you can borrow) and perhaps more importantly, the interest rate. Proper packaging and underwriting can make a difference of as much as 2 percent in the annual rate, or five years amortization. On the typical $3 million self-storage loan, the difference in monthly payments of $2,920 (five years difference in amortization, and a conservative interest-rate savings of .5 percent) over the life of the loan, is a cash savings of a whopping $350,418.

There are a few things to consider. First, do you have the time to seek the lender best qualified to make the transaction? How much is your time worth to spend looking for financing? Sure, you check the obvious places, but what if your best deal is with a boutique lender? How do you find one?

Second, how do you know for certain who you're dealing with? I recall several transactions where the lender was a sham--they never had a real program and were just looking for processing and application fees. I also clearly remember a lender I thought could not possibly be for real and, sure enough, they funded two of my transactions.

Cost vs. Benefit

Brokered Loan
Principal Number of Payments Interest Rate Monthly Payment
$3,000,000 300 9.00% $22,500
$3,000,000 300 9.25% $23,125
$3,000,000 300 9.50% $23,750
$3,000,000 360 9.00% $24,334
$3,000,000 360 9.25% $24,875
$3,000,000 360 9.50% $25,420
Total over the life of the loan savings...$350,418·
·Assumes savings of .5 percent on the rate and the amortization is extended five years.  Both are very reasonable assumption.   While no savings can be guaranteed, the results are typical.

Third, a good reason to use a broker is he is often the best-qualified source of "packaging" your loan for underwriting. A good broker will make sure you have a loan request that is tailored to the lender's needs, providing the information he needs to develop an interest in your deal. Keep in mind that overloading your loan officer is as bad as not providing him with enough information. Is your request clear? Are the expenses properly shown? What about capital improvements? What about the interest expense? What about vacancy and credit loss? How do you determine loan to value?

Lastly, there are the finer details of the transactions. Financiers today manage interest rates with hedges, caps, locks and a myriad of other terminology that to the borrower may be "junk jargon." Many a borrower has sold a cap and made money, or benefited from a hedge when rates rocketed upward. Do you know when to take a fixed-rate loan over a float? Do you know that some loan documentation for conduit loans may require you to pay for loan expenses like appraisals after the loan has closed? Did you know that some standard language allows the lender to change the terms of the loan at the time of securitization?

There are several reasons it is wise to retain professional help. Keep in mind that the best loan broker will know your property intimately, know the market and determine who the best-targeted lender will be. The broker is also able to work with and resolve issues introduced by third-party report providers such as appraisers, engineers and environmental specialists. Finally, the properly qualified loan broker will have placed many self-storage loans and will have been in the industry for a long period of time. The best brokers will even know how to operate self-storage facilities and be able to trade "war stories" with you.

R.K. Kliebenstein has worked in the self- storage industry since 1986. In that time, he has held positions in finance, acquisition and management. He is currently launching his own company, Coast-To-Coast Storage, offering his expertise to self-storage owners and operators in consulting, marketing plans, feasibility studies, loan brokering and acquisition/disposition. For more information, Mr. Kliebenstein may be reached at (561) 367-9241.

Neal Gussis is a senior vice president at Beacon Realty Capital Inc., a financial-services firm that arranges debt for self-storage and other commercial real-estate owners. Mr. Gussis has funded more than 250 self-storage transactions. He can be reached at (312) 207-8240.

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